Corporate Finance: When Monetary Policy Tightens

by Cesar Bacani, 09 February 2010

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Corporate Finance

tags:
Basle II debt financing interest rates IPO loans monetary policy

After spending 11 years with investment bank N.M. Rothschild, four years with HSBC and most recently three years with HVB/Unicredit, Quentin Amos joined Australia-listed mining and resources specialist Runge Limited last year as head of corporate finance and advisory for Asia Pacific.

He is thus uniquely placed to talk about credit and financing trends in the region from the prism of mining and resources. “My theory of money for projects is, if you want it, and you can get it, go and get it and don’t worry about pricing,” says Amos. “I don’t have a crystal ball so I don’t know what’s going to happen in the future. But if I’ve got a good strong project and I can finance it now, I’d take the money.”

On a recent visit to Hong Kong, Amos spoke to CFO Innovation’s Cesar Bacani about the credit and investment picture in Asia, the prospects for financing resources and mining ventures, and the way forward for the region.

Why are you here in Hong Kong?

Hong Kong has a fabulous amount of money. It’s a prime global financial centre. And if it’s not the centre, it’s probably close to it because of the huge amounts of liquidity that are available on the mainland and available in the immediate region. It’s certainly a very exciting place to be. It’s a nice place to do business.

You are seeing a lot of liquidity still in Hong Kong?

The truth is, there is a tremendous amount of liquidity in this region. I will quote one of our clients here: “There’s one Louis Vuitton store in Paris; there are six in Hong Kong. Hong Kong Chinese go to Beijing to buy knock-offs; Beijing Chinese come to Hong Kong to buy the real thing, and they don’t buy one handbag, they buy 20 handbags at one go.” That’s liquidity.

But corporates do not necessarily have access to this liquidity, right? They need to go to the banks, which are still saddled by toxic assets, and financial markets, which are currently roiled by loss confidence in emerging Europe and tightening in China.

Prior to the global financial crisis, it was quite easy to go and get equity because everybody was throwing money at mining projects. And it was easy to get debt – the debt market was very strong and the syndication market was very strong. After the GFC, life changed.

The difficulty with debt-raising at the moment is that the syndication market that was there for 30 years has almost ceased to exist. Banks simply don’t have the confidence that, if they took on, let’s say, US$500 million of debt, they would find other banks willing to buy and sell down their position. In 2007, the core of banks [that specialise in funding mining projects such as HVB/Unicredit, Barclays Bank, Maquarie Bank, BNP Paribas and West LB] could have gone out to another 40 banks to support a big deal.

Those other banks would have said, “That’s all right, these people know what they’re doing. If we have detailed questions, we can ask those banks.” But now, those 40 banks have disappeared. They won’t do this business because they say that [mining and resources] are high-risk businesses that demand specialisation.

And lenders like Bank of America are laden with bad debts.

Bank of America [recently announced new provision of] another US$10 billion for bad loans. Now that really affects the syndication market. If Bank of America has US$10 billion in bad loans, how much has everybody else got? The general consensus is that there is something around US$2 trillion of toxic debt floating around [in the U.S.] . . . There are lots of rumours in the market place about certain banks. You talk to knowledgeable people, and you ask if this bank is OK, and they say, maybe, maybe not.

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